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Pension Advance Pitfalls

If you’re a retired government employee or military member with a pension, you may see or be sent offers for a “pension advance”. This requires you to sign over all or some of your monthly pension payments for a certain period of time in exchange for an up-front payment. If you need extra cash, this can be enticing, but be extra cautious.

Unlike a typical cash advance or loan, you are actually signing over your future pension payments, which is how the cash you receive is repaid.

Fees can be extremely high; around 27 to 46 percent, with some rates much higher according to a Government Accountability Office (GAO) report, which also found that most companies didn't fully disclose rate information, like credit card companies and other lenders are typically required to do. In fact, regulators are investigating pension advance companies to see if they violate interest rate and disclosure laws.

You may be asked to buy life insurance structured so that the pension advance company is named as the beneficiary.

If you’re intrigued by a pension advance, make an informed decision:

Get it in writing. Ask for the contract’s Annual Percentage Rate (APR), which represents the total yearly cost by factoring how much you borrow, the interest rate, fees, and the contract length. Identify any other fees that might apply, such as a commission or required life insurance costs. Cost information may not be clearly disclosed, which may make this step difficult, but consider that a red flag if so.

What if you change your mind? Identify whether you can cancel the contract.

Compare the costs and terms to other lending options, such as a loan from a bank, credit union, credit card, or other loan company.

Contact existing lenders. If you need an advance to pay off other debt, contact those lenders to see what options you have. You may be able to restructure the terms so they are more favorable.

Government assistance. If you’re in financial straits, see if you qualify for government assistance. Visit www.benefits.gov or www.benefitscheckup.org. If you own a home, a reverse mortgage might make sense – visit www.hud.gov and search for “reverse mortgage”.

Independent contract review. If you still want to move forward, see if you can have a CPA or lawyer review the contract to help you uncover pitfalls you might not have been aware of.